The Hindu Business Line : Benchmark S&P CNX 500 Fund

Do you wish to own a basket of 500 stocks that represent 95 per cent of the total market capitalisation ? Benchmark’s S&P CNX 500 index fund could well be a choice. Launched in November 2008, this passively managed index fund may be suitable for investors looking for market returns without additional risks.

Index funds

Index funds are passive investment options; they come in handy specifically in volatile markets. For instance during the correction in October 2008 or the lows in March 2009, passive investors baffled by the market movements, could have safely bought in to index funds such as the CNX 500 – effectively ‘buying the market’.

As actively managed equity funds may not be able to quickly deploy their cash in to equities during such declines, index funds tend to acquire an edge in the initial rally. For instance, only one in five diversified equity funds managed to equal or beat the CNX 500 between March 9 and April 30, although a number of them caught up in the following month.

Further being a very broad-based index, the CNX 500 helps eliminate the risks of excessive exposure in single stocks or sectors – a risk prevalent both in direct investing as well as in actively managed mutual funds.

Holding the S&P CNX 500

The CNX 500 emerged as one of the tougher benchmarks to outperform given its exposure across market cap segments/range of sectors. Over a five-year period, the CNX 500 has returned 22 per cent compounded annually.

This does not necessarily imply that active diversified funds have not managed to beat this index. For instance, while the average three-year returns of diversified equity funds (9.5 per cent) have marginally lagged the CNX 500 performance of 10.5 per cent compounded annually, one in 2 funds have actually beaten the benchmark. Even as an index such as the CNX 500 may provide a well-balanced mix of small and large-cap stocks, funds that take focussed exposure to market-cap segments/sectors tend to outperform this index.

While index funds may be good options to buy in to the markets during steep falls this would require timing the market. Systematic Investment Plan (SIP) route to gaining exposure to index funds may be an option to help average rupee costs, but may not generate superior returns through timing the market.

Value averaging

With the aim of generating returns higher than a regular SIP, Benchmark has introduced Value Averaging Investment Plan (VIP). This is an investment strategy where the Benchmark’s CNX 500 index fund is bought at regular intervals. The only unique feature is that the amount of investment automatically increases while the market drops and deceases when the market rises, thus attempting to follow the theory of “buy on lows and sell on highs”. While it may be hard to predict when the markets hit the low/high levels, investors can nevertheless set aside additional sums on every decline to buy more at lower costs.

To illustrate, assume you invested Rs 1,000 in the markets and the value of your investment has declined to Rs 800 the next month (in other words, the market has declined). Under value averaging, instead of investing the same sum of Rs 1000 again, you would invest Rs 1200 in order to keep your portfolio value at Rs 2000.

Thus, you would have bought more during a decline. Inversely, you would be investing less if your investment value had gone up on a rally. Benchmark Mutual provides investors with an option of investing every month in the CNX 500 index fund using the value averaging strategy. The fund would have a default return of 15 per cent per annum, which is the index’s historical return. A sum of Rs 2000 per month would be the minimum first time investment, post which investors can set the maximum permissible amount that can be invested.

If the fund’s return is lower than this default rate, more sums (within the maximum cap set by the investor) would be invested; conversely, lower sums would be invested if the returns are higher than the targeted rate. Instead of simply averaging, the fund’s strategy of setting a return rate, may aid investors who wish to plan for their long-term financial goals.

However, as with any other index fund, investors may have to keep track of the fund’s return vis-À-vis the index return to know the extent of tracking error. Huge underperformance over the index may not be a positive signal.

Note that the fund can also invest 0-10 per cent in debt and other securities. This could be one of the reasons for any marginal underperformance. CNX 500 Index Fund will not have entry load but would have varying exit loads if redeemed within three years.

VIDYA BALA

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